If You Sell Stocks, What Do You Do With The Money?

Ok, so the big question is: if you sell your equities, where do you go with the money? Think again in the big picture: stocks, bonds, or cash?? I think sooner or later, folks will realize the stock market offers the best long term value for your money. If your goal is to beat taxes and inflation, by default, stocks win.

Ok, so the asset allocation decision regarding where to go if you sell your stocks, has me pondering the Fed Valuation Model. Click here for what it is.

I also went to the McGraw Hill S&P site to determine the next four quarters earnings expectations. As reported S&P earnings forecasted for the next 12 months = $83.70. Therefore, with the S&P 500 currently trading at 1371, the market PE ratio = 16.37. The Fed Model, however, reverses the PE, and it becomes an earnings yield calculation, a E/P if you will. The calc is as follows: 83.7 / 1371 = 6.1%

It's straight forward from here, you compare the earnings yield of the S&P 500 to the 10 Year Treasury Yield, which stands today at 3.66%. Therefore, stocks are vastly undervalued compared to bonds. You can buy the 10 Year Treasury and lock in 3.66% today, or you can step out on the risk curve, and embrace the volatility of the stock market, in the hope you achieve something closer to 6% or better returns from equities. My suspicion is that over the next ten years, an investor will do better in stocks versus bonds. The key, you don't blink when things get tough, as they are right now, and consider investing a marathon and not a sprint. Good luck.